The Determinants of Consumer Price Index in Indonesia

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THE DETERMINANTS OF CONSUMER PRICE INDEX IN INDONESIA

Instructor
DR. Moussa Larbani

Prepared By
Ali Faris(G0912449)
Imala Hussain(G0822498)
Ma Yue(G0918271)
Mia Fathia(G0827756)
Nurma Saleah(G0912298)
Suthinee Suayngam(G0916798)
Ulfah Hidayatun(G0815892)

ECON 6030
ADVANCE QUANTITATIVE METHOD
Term Paper

Kulliyah of Economics and Management Sciences

Department of Business Administration

2009/2010

Abstract

The most well known and widely quoted economic indicator is the CPI (Consumer Price Index). It represents an estimation of the change in prices of consumer goods and services. Generally, it represents a measurement of our expenses on goods and services we use to meet our day-to-day needs. Severe problems to the overall economy can be caused if the prices of consumer goods and services are abruptly changed. This paper attempts to examine the factors that influence the Consumer Price Index. We observe four variables, namely, money supply, gross domestic product, interest rate, and share price. By utilizing quarterly data from 1996 to 2008, this study applies multiple regressions method to find the best model and factors which can explain Consumer Price Index. The result indicates gross domestic product, interest rate, and stock price significant effect to consumer price index, whereas money supply does not have significant effect. This study also finds that the highest Adjusted R2 as goodness criteria of the model is derived when we include all the factors in the model. Hence, we can conclude that those factors have either strong or weak contribution to consumer price index. Keyword: Consumer Price Index,

1. INTRODUCTION

From the beginning of civilization, tribes, countries and nations have always been looking for ways to attain prosperity and growth so as to improve the standard of living for their own people. From the times of Caesar to leaders of today such as John F. Keneddy, things haven’t changed much. To attain prosperity one of the most important things is to maintain a healthy economy. However there are many factors that threaten a healthy economy such as inflation, economic recessions and many other factors. Despite all these threats and inevitable slumps and declines in economy, an economy can be monitored and as such Consumer Price Index is one of the most important economic indicators. Using consumer pricing index, the health of the economy can be in check and the state can take necessary preventive measures otherwise not taken could lead to devastating effects in the form of high unemployment, bankruptcies, major financial losses etc.

The CPI is a fixed-basket price index as it represents the price of a constant quantities basket of goods and services purchased by the average consumer. CPI is one of the most frequently used statistics for identifying periods of inflation or deflation. This is because large rises in CPI during a short period of time typically denote periods of inflation and large drops in CPI during a short period of time usually mark periods of deflation. It is compiled by the Department of Labor's Bureau of Labor Statistics. In order to get the final result for the CPI, wide researches of the prices of the included in the consumer basket goods and services are made. Then they are entered into a special computer program that makes the calculations.

The importance of CPI is viewed in the fact that the estimations of other products, services and benefits are directly linked to the levels of the CPI. For example, if the CPI experiences an increase in its value, then the Social Securities benefits will rise as well. Other things that are directly linked to CPI include: • Wages

• Lease agreements
• Union contracts
• Benefit statements and...
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